Deficit spending for dummies
Posted by WARREN MOSLER on February 19th, 2009
The media is screaming that deficit spending simply takes money from borrowers and gives it to someone else, so it doesn’t work.
This is NOT the case. In fact, deficit spending ADDS to our total savings of financial assets.
Operationally, this is how $100 billion of deficit spending ‘works’ to ADD to nominal savings of financial assets:
- The Treasury sells $100 billion of treasury securities.
- Paying for the new securities reduces member bank balances held at the Fed by $100 billion.
- And our holdings of treasury securities increase by $100 billion.
- The Treasury spends the $100 billion it got from selling us the $100 billion of new treasury securities.
- This increases member bank balances at the Fed by $100 billion.
Quick recap-
We buy treasury securities from the government which means we have $100 billion more treasury securities.
We pay for them which means we have $100 billion less in our bank accounts.
So far all we have done is exchange bank balances at the Fed for treasury securities, which also held at the Fed.
So far nothing of economic consequence has changed, apart from now we could be earning more interest on our treasury securities than we had been earning on our Fed balances.
Final recap:
- Bank balances are back where they started from.
- Our holdings of treasury securities, which are financial assets and saving, have increased by $100 billion.
Conclusion and proof:
Government deficit spending of $100 billion necessarily increases savings of financial assets by $100 billion.
Please distribute as widely as possible as a matter of further public purpose!!!
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February 19th, 2009 at 12:19 pm
Who are you calling a DUMMY?
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February 19th, 2009 at 1:50 pm
i thought gov’t spending came first. then replacing fed balances with securities.
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February 19th, 2009 at 2:13 pm
RSG -
I think Warren is trying to keep things as simple as possible for those not “in paradigm” to follow. (hence the “dummies” part) While it is true that, as a logical matter, spending must come before selling treasuries, on a day-by day basis (with all sorts of balances swirling around in the system and Fed open market ops and TT&L account transfers) this is not always clear, even to the people doing the spending and selling.
I think the point is, even if you forget about the “special” role of the Treasury w/r/t the banking system, the fact is that ANY act of borrowing, even by a “normal” person, adds to the total stock of financial assets. The money NEVER “comes from” anywhere, and the whole idea that what the banking system does is “move money around from lenders to borrowers” is a fallacy even before you start adding the particular properties of central banks and currency issuers into the mix. Why not try to get people to understand the basics before you hit them over the head with all sorts of topsy-turvydom?
As Warren said some time ago, it isn’t some special law or voodoo that allows banks to create money, it’s just accounting.
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February 19th, 2009 at 2:17 pm
What do you say in response to the question that is often posed, “How do we pay it back?”
I know that the question is flawed in that it assumes a new liability by the government from “borrowing,” yet the gov’t doesn’t borrow, per se. However, it’s a hard question to easily answer without getting into a very complicated explanation about how the government spends by crediting bank accounts, is not spending constrained, doesn’t really borrow, etc, etc.
Is there a way to show that “paying back” means lower wealth for the private sector to the extent that it reduces the amount of assets held in the form of Treasuries? Explain.
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Scott Fullwiler Reply:
February 20th, 2009 at 1:15 am
Hi Mike . . “paying it back” means running surpluses, which means destroying net financial assets, by definition. Everything in Warren’s original post above in reverse. And then the only way reserves could circulate once it’s all “paid back” is by the private sector borrowing from the Fed in some form or another.
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February 19th, 2009 at 2:18 pm
The dummies will then say:
What if no one buys the securities issued in step 1?
When the government has to pay back the treasuries in step 5 won’t it need to tax people to do it?
………..
I think you should stick with the government spending precedes selling of treasuries. When I ask people where the Chinese get the dollars to buy treasuries with, is when I finally get a few of them to start thinking. Plus that was the explanation that convinced me when I first found this site.
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warren mosler Reply:
February 19th, 2009 at 5:17 pm
good points.
i was addressing the current nonsense that says govt spending only takes funds from one person and gives them to another, whether it taxes or borrows. taxing and borrowing are categorically different.
the question of what happens if no one buys the tsy secs is actually more valid, as under current law the tsy can’t run an overdraft at the fed and the fed can’t buy tsy secs directly from the tsy.
these are self imposed constraints left over protections from the gold standard.
i’d eliminate both of those self imposed constraints and rework the fed/tsy relationship to better serve public purpose.
paying off the debt for dummies coming up!
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Scott Fullwiler Reply:
February 19th, 2009 at 5:38 pm
Of course, even if you don’t eliminate the restriction on the Fed for providing overdrafts to the Treasury, Treasury rates are effectively set by monetary policy, anyway, so the rate paid on the debt is a policy variable whether you change the law or not. See Japan, for instance.
And you can’t buy a Tsy without reserve balances, which themselves can only exist as a result of a previous deficit or borrowing from the Fed.
Finally, as I’ve been saying for years, it’s inconceivable to me that the Fed doesn’t actually provide intraday overdrafts to the Tsy, given the voume and variability of daily debits/credit to the Tsy’s balance (largest transactor in the world, actually) and the fact that the Tsy in normal times holds a relatively small balance. I’ve sustpected this is actually the case for some time, but the Tsy stonewalls me every time I try to get access to this volume of the Tsy’s financial manual. But this intraday credit alone is already sufficient to enable the Tsy to run a negative balance in its account as it arranges whatever temporary operations might be necessary to meet the Congress’ requirement not to receive overnight credit from the Fed. Overall, then, I don’t see this law as providing any actual constraint to the Tsy, though it certainly requires unnecessary waste of resrouces to get around it.
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Jim Baird Reply:
February 19th, 2009 at 6:13 pm
Hmmm - does the Fed ever submit to any external auditors? If it were to allow the Treas. an overdraft, how would anyone know?
anon1 Reply:
February 20th, 2009 at 7:59 pm
“it’s inconceivable to me that the Fed doesn’t actually provide intraday overdrafts to the Tsy”
I’m confused. You don’t mean “inter-day” overdrafts here (i.e. overnight)?
February 19th, 2009 at 3:13 pm
The loanable funds /deficit hawks will be tough to convert, especially since global events have, in their minds, proven them right. Mark Faber’s editorial in today’s WSJ is yet another example.
The irony is that many fiscal hawks also want the Fed to continue to provide “liquidity” to the system. They want to shut off the true liquidity of fiscal spending for the illusory liquidity of Federal Reserve portfolio management. Ridiculing them on this point might help.
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February 19th, 2009 at 9:01 pm
Okay, I’m confused over this relatively simple exercise.
The Fed gave the Treasury $100 billion in dollars for the government issued treasury security. So the Fed is -$100 billion and the Treasury is +$100 billion. But, the Treasury still owes the Fed the $100 billion back plus interest.
Now, the Fed can then sell this treasury security to investors looking for a safe return. This purchase has to be in dollars of course so a foreign entity would need to purchase dollars in order to purchase this treasury security. The liability has moved from the Treasury paying back the Fed, to the Treasury paying back the new owner of the treasury security.
It would appear that when an investor gives the Fed $100 billion for the treasury security that this would be deflationary, but since the Treasury has $100 billion in new dollars it is usually planning on spending this money and through velocity of money this $100 billion can create more nominal dollars in the system.
Since we are in times where money is tight though, the Fed needs to reverse the flow and instead of selling treasury securities it needs to buy them. Thus, the money paid by the Fed to an investor or investment bank for the treasury securities that the investor owned would enter the banking system and be able to be loaned out through the fractional reserve banking system thus increasing the money supply 10 fold or whatever the rate of the reserve policy may be.
So, assuming I’ve got that all correct (which I’m sure I’ve lost something somewhere along the line), why does the government need to sell treasury securities to get cash from the Fed to begin with? Why can’t the government just pay directly to the producers of the goods and services it needs the $100 billion and owe no debt on this money? The function of a fractional reserve banking system which has the authority to increase and decrease the money supply in concert with a central bank could still be used, but the necessity of first creating a debt from the government could be avoided. Can’t the Fed just maintain a supply of money to loan to banks? The government can dictate what level of the money supply should be based on CPI or other metrics used to measure the economy. Yes, this sounds like bank nationalization. But, is that bad? Could it be any worse than what we’ve got today? We’ll soon be paying income taxes equal to just the interest on the national debt. If we removed the debt, couldn’t we then remove income taxes? And since the government created the money from nothing with no debt and then spent this money into the economy why would we need to pay income taxes at all? (Okay, sorry for piling on at the end here.)
Where am I wrong on this?
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February 19th, 2009 at 10:55 pm
First, I started with the Tsy getting the funds from a private sector buyer of the securities- a bank, for example- that currently has sufficient balances at the fed to pay for the securities. (Current Fed policy is meant to sustain bank reserves above required levels.)
How is a bank using its excess reserves to buy Treasury securities deflationary? It’s not, any more than the Fed’s policy that resulted in higher reserve levels has been inflationary. The reason is that bank’s are in no case ‘reserve constrained’ when lending. The ‘fractional reserve banking system’ you describe is applicable only with fixed exchange rate regimes, like a gold standard or currency board arrangement, but is not applicable with todays non convertible currency regimes. (start with ’soft currency economics’ under ‘mandatory readings’ on this site?)
The key is (net) private sector holdings of financial assets, aka ’savings’ of financial assets.
When the govt buys financial assets from the private sector, net financial assets remain unchanged. All that happens is an exchange of financial assets between govt and non govt agents.
When the govt buys goods and services that adds net financial assets to non govt agents- their income (directly from the govt. spending) and savings goes up. And the govt spending itself counts as gdp.
When the govt buys non financial assets, income is unchanged but our savings goes up.
When the govt cuts taxes income and savings goes up.
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Scott Fullwiler Reply:
February 20th, 2009 at 12:33 am
Perfect.
And the quantity of net financial assets along with desired net saving are the M and V (actually, inverse of V), respectively, that everyone’s been searching for.
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The Interest Reply:
February 20th, 2009 at 12:38 am
“How is a bank using its excess reserves to buy Treasury securities deflationary?”
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warren mosler Reply:
February 20th, 2009 at 8:24 am
yes, if we don’t include cash in circulation and bank balances as the fed as ‘the national debt.’
Cumulative govt deficit spending =
cash in circulation
member bank balances at the Fed
Treasury securities held by the non govt sectors
These are the net financial assets of the non govt sectors.
The Fed alters the mix but not the total with it’s monetary operations.
But:
Net interest earned reduces non govt financial assets much like a tax does.
Fed spending on non financial assets (food, travel, paper clips) adds financial assets to the non govt sectors much like the rest of government spending does.
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The Interest Reply:
February 20th, 2009 at 2:38 pm
I think we’re in agreement that the government can issue a bill or a bond, its the same thing and can be swapped out. The exception is that the bond must be paid back with interest.
So when you say this: “Net interest earned reduces non govt financial assets much like a tax does.” Does that mean that the interest the government pays on these bonds (through our taxes) reduces the value of private financial assets?
warren mosler Reply:
February 20th, 2009 at 3:20 pm
Interest paid by govt. is an ‘inflationary bias’ of some magnitude as it is ’spendable income’ to the recipient.
This is just like most other payments by government, but unlike purchases of financial assets by government
The Interest Reply:
February 20th, 2009 at 6:36 pm
“Interest paid by govt. is an ‘inflationary bias’ of some magnitude as it is ’spendable income’ to the recipient.”
Interest then devalues financial assets due to inflation that is introduced. Isn’t there another disconnect where the govt has transferred wealth from the taxpayer to the bond holder via the interest payment?
Also, if one takes on too much debt where their income goes to only pay interest payments and not any principal don’t they reach a point where they can’t take on any more debt? On the other hand the public debt of the government may in theory never run out due to the accounting entries that can be generated on the Fed books. But since the interest payment on this debt requires the taxpayer to make this payment isn’t there a point where the taxpayer is saddled with so much public debt that if a shock happens to the economy and tax revenues are reduced that we risk not being able to pay the interest payment to the bond holder?
February 20th, 2009 at 3:11 am
like peter lynch said, spend 15 minutes with an economist and you’ve wasted 14 minutes
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February 20th, 2009 at 9:42 am
winterspeak got this right, government deficits cause a change in the term structure of debt.
What does this tells us? It tells us bad news if the changed term structure of debt is less stable than the old term structure of debt. In the reverse case, it tells us good news.
And finally, it is an effect that can happen among any of the large economic sectors, not just government.
In other words, get a better metaphor to explain how term structures can change because this naive metaphor incorrectly implies that the result is only an effect of government deficits.
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February 20th, 2009 at 9:48 am
winterspeak got this right, government deficits cause a change in the term structure of debt.
YES, BUT ONLY BECAUSE THE TREASURY ELECTS TO ISSUE SECURITIES LONGER THAN ONE DAY, AND ONLY BECAUSE THE FED ALLOWS ANY PARTICULAR TERM STRUCTURE OF RISK FREE RATES.
THE FED HAS FULL CONTROL OVER THE TERM STRUCTURE OF RATES
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February 20th, 2009 at 11:01 am
“THE FED HAS FULL CONTROL OVER THE TERM STRUCTURE OF RATES”
Whoa baby, stop right there.
The term structure of debt cannot be changed arbitrarily without demonetizing part of the economy. Remember, the economy is still restricted by the term structure of productivity. As Brad Delong points out, a billion dollar silicon wafer, of necessity, is fixed to have a long and useful (hopefully) life of enhancing growth (hence productivity). If the federal government could arbitrarily change debt greenback term structure to be at variance with productivity term structure, then the federal government would have to make wafer fabs disappear and be replaced instantaneously. The feds cannot do this, they can change the term structure of interest, but if they are at variance with productivity, then productivity must be demonetized.
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February 20th, 2009 at 1:54 pm
The term structure of debt cannot be changed arbitrarily without demonetizing part of the economy.
WHATEVER THAT MEANS. THE FED DOES HAVE THE TERM STRUCTURE OF RISK FREE RATES AT IS CONTROL AS THE MONOPOLY SUPPLIER OF NET RESERVES.
THE FED IS PRICE SETTER AS A POINT OF LOGIC. THERE’S NO WAY AROUND IT.
Remember, the economy is still restricted by the term structure of productivity.
WHATEVER THAT MEANS.
As Brad Delong
THE SAME HARVARD EDUCATED DELONG THAT RIDICULES THE NOTION THAT THE CAUSATION RUNS FROM LOANS TO DEPOSITS??? HOPELESSLY STUCK IN FIXED FX RHETORIC IN A FLOATING FX WORLD???
points out, a billion dollar silicon wafer, of necessity, is fixed to have a long and useful (hopefully) life of enhancing growth (hence productivity).
MAYBE, MAYBE NOT. IT COULD BECOME WORTHLESS FOR ADDING TO REAL OUTPUT OR INCREASE ITS USEFULNESS IN ADDING TO REAL OUTPUT AT ANY TIME FOR A VARIETY OF REASONS.
If the federal government could arbitrarily change debt greenback term structure to be at variance with productivity term structure, then the federal government would have to make wafer fabs disappear and be replaced instantaneously.
NOT AT ALL. FOR EXAMPLE, IF THE FED ANNOUNCED IT’S CURRENT RATE OF INTEREST WOULD, BY LAW, BE FIXED AT .25%, INTEREST RATES OUT TO 10 YEARS WOULD QUICKLY GRAVITATE TO APPROXIMATELY THAT LEVEL. DOES THAT MAKE WAFER FABS VANISH? DOES THAT ALTER REAL PRODUCTIVITY?
The feds cannot do this, they can change the term structure of interest, but if they are at variance with productivity, then productivity must be demonetized.
WHY CAN’T REAL PRODUCTIVITY GROW AT SAY 2% WITH ALTERNATIVE TERM STRUCTURES OF RATES?
SORRY I’M NOT VERSED ENOUGH IN THE PARTICULAR THEORY YOU ARE LEANING ON TO GIVE AN EDUCATED ANSWER YET.
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February 20th, 2009 at 1:56 pm
WARREN: You are interpreting my comment directly. In the current system, the Fed issuing Treasuries changes the term structure of the outstanding debt. The emphasis being “in the current system”.
As you say, this is not necessary. The Fed could determine what the term structure of the entire yield curve was, if it chose to do so.
MATTYOUNG: I have no idea what the “term structure of productivity” means. If it means that real assets can be long lasting, than sure, but we’re talking about money here which is the furthest thing in the world from a real asset.
So you take on debt to build a billion dollar silicon wafer plant. The rate you pay for that debt is not determined by the rate the Government pays on a 30 year bond. FFR is a part of it, term structure is a part of it, and the credit risk of the private asset being financed is part of it. The credit risk should actually be the biggest part of it, and that can be sort out through market supply and demand.
I may deviate from Warren here and state that I believe the duration of private debt should be matched–we don’t need liquidity crises to be an inherent part of our financial system.
But when we’re talking about public “debt”, it’s all just points the Govt and shift about as it likes. It’s a currency issuer, and we’re all just currency users.
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MattYoung Reply:
February 20th, 2009 at 6:35 pm
winterspeak.
Let us say that some investment will yield 8% over its 20 year life time, and that the market can support many of these investments. There may be few other investments that lead to 8% annually over a twenty year period.
So, the treasury says we do not like this, so treasury is going to offer 9% on 20 year notes by shifting its supply of twenty year borrowings to 2 year borrowings, trying to twist the yield curve to prevent investments in the other product. The fed wants to drive up its long term borrowing costs and reduce their short term borrowing costs so that the fed gets all the 20 year investment business.
One two thing will happen.
One is that the federal government wins all the 20 year investments at 9% and none goes to the other investment opportunity. In that case, the expected 20 year productivity enhancement disappears.
The other case is that the other investment takes real estate shares (or gold) rather than money investments, thus working around the twist; essentially demonetizing its affairs from the greenback.
To get a better grasp of the theory look at George Seglin’s work.
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winterspeak Reply:
February 20th, 2009 at 6:55 pm
Hi MattYoung:
Yup, if the Treasury issues 9% on 20 year notes, then people would exchange cash bank deposits (one kind of liability) for these awesome 9% 20 year notes (another kind of liability).
This would certainly reduce the I component of AD. But the yield curve would have 20 years Treasury at 9% — set by the Govt (which is what Warren and I say). The Treasury can set the yield curve however it wants.
We never argued that setting it incorrectly would be good for the economy.
Our area of disagreement was the claim that the Gov can dictate the entire yield curve. I say it can, you say it cannot.
It now looks like you’re saying that the Govt can after all, but may harm the economy by getting it wrong. We are in agreement there.
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February 20th, 2009 at 1:58 pm
yes, thanks!
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February 20th, 2009 at 2:01 pm
sorry, I meant “you are interpreting my comment correctly”
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February 20th, 2009 at 5:23 pm
Returning to government issuing treasuries when it wants to spend more, why does government bother with silly bits of paper called “treasuriesâ€ÂÂ, and why does it go to all the bother of attracting millions of dollars to swap for the silly bits of paper? It would be simpler for the “government – central bank machine†to just have a special cheque book (paper or electronic) which enabled government to increase spending as and when necessary.
Winterspeak asks this question, more or less, at the end of the Winterspeak.com post entitled “Deficit spending *enables* private savingsâ€ÂÂ. I asked the same question at an Adam Smith Institute blog a month ago. And as far as I can see Messers Mosler, Galbraith etc are saying something similar in their “Alternative Bank Liquidity Proposal†elsewhere on this site.
The “special cheque book†system brings government and central bank into a closer relationship: undesirable where a country wants an independent central bank. But this problem could probably be sorted.
Another reason why the above “special cheque book†system makes more sense than the “silly bits of paper†system is that the net effect of the latter is “government donates bits of paper worth at least a million dollars each and which pay interest†to the private sector. This is slightly illogical in that when a government thinks a deficit is appropriate, it is really aiming to get additional CASH into the private sector with a view to boosting demand. Bits of paper worth a million dollars each do not boost demand except in that they improve the balance sheets of the private sector: a sort of Pigou effect.
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jcmccutcheon Reply:
February 20th, 2009 at 6:18 pm
why does government bother with silly bits of paper called “treasuriesâ€ÂÂ, and why does it go to all the bother of attracting millions of dollars to swap for the silly bits of paper? To execute interest rate policy.
It would be simpler for the “government – central bank machine†to just have a special cheque book (paper or electronic) which enabled government to increase spending as and when necessary.
I would be simpler to just pay interest on reserves and get rid of confusing T-Bills.
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WARREN MOSLER Reply:
February 21st, 2009 at 12:44 pm
i think i first wrote about this in 1993
see ’soft currency economics’ under ‘mandatory readings’
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anon Reply:
February 21st, 2009 at 4:17 pm
Yes, its necessary to execute interest rate policy.
It’s also necessary to have at least one alternative to forced financing of the deficit entirely though the banking system.
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February 20th, 2009 at 6:34 pm
RALPH: I had the same question. Traditionally, they do it to drain excess reserves at the Fed, which enables an interbank overnight lending market, that the Fed then manipulates through open market operations to set the Federal Funds rate.
In other words, in order for banks to need to trade with each other so they can meet their legally obligated reserve requirements, the Fed needs to remove excess reserves from the accounts, and it issues Treasuries (that yield interest) to move these reserves out. Once the amount of reserves for the banking system as a whole has been reduced to the mandated level, individual banks must borrow and lend to each other to each one meets *its* reserve requirements. Through repos, the Fed manipulates this overnight lending rate, which we know as the Federal Funds Rate, so that it hits its target.
If this seems convoluted to you, you’re not the only one. Reserve requirements in general, IMHO, is this vestige left over from the gold standard, and makes no sense in today’s fiat world. These ludicrous contortions to set something as simple as an overnight rate are pointless, and would certainly not be created if the system were built from scratch today. The entire contraption could be replaced by an overdraft facility at the Fed.
“Bits of paper worth a million dollars each do not boost demand except in that they improve the balance sheets of the private sector” Balance sheets matter! What is an “animal spirit” if it is not an attitude engendered by the state of one’s balance sheet?
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anon1 Reply:
February 20th, 2009 at 8:17 pm
“The Fed could determine what the term structure of the entire yield curve was, if it chose to do so.”
Could you provide an example of how? Thx.
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WARREN MOSLER Reply:
February 21st, 2009 at 12:42 pm
several ‘methods’ though each has its own considerations:
It could simply announce what future fed funds rates it was going to set.
It could make a market in the term fed funds swap markets
It could make a two way market in Treasury secs for every tsy issue out the curve (this would require congressional authorization)
etc.
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anon1 Reply:
February 21st, 2009 at 1:28 pm
thx, those indeed are concrete examples which could be part of monetary policy implementation if desired
February 21st, 2009 at 10:10 am
If anyone is interested, “deficit spending for dummies” in balance sheet form is presented in slides 20-22 of the presentation below from the EPIC site. The slides show deficit spending preceding bond sales, but obviously the net effects on balance sheets are the same whether you start with the spending or the bond sale.
http://www.epicoalition.org/docs/InterestRates.ppt
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February 21st, 2009 at 1:10 pm
Warren,I AM WORKING.In the meantime,would you like to comment on Bernanke’s presentation at NPC on Feb 18?
NEW & NOTEWORTHY
Posted 02/19/200
———————————————————————-
Bernanke Promises Exit Strategy, Transparency
Ben Bernanke, chairman of the Federal Reserve, explained how the Fed has used an “innovative†course of “credit easing†to address the current financial crisis at a Luncheon Feb. 18. Innovation is required, he said, because the conventional policies available to the Fed are insufficient. He reassured listeners that the result of such innovation – a doubling of the dollar value of the Fed’s balance sheet – will not be permanent; there is an exit strategy. He added that the institution is initiating public information programs to make policies more transparent.
The policy innovations he described consist of the Fed’s making loans to and purchasing financial assets from domestic institutions and swapping dollar credits for foreign currency credits with 14 foreign central banks, to ease credit globally.
Bernanke said the Fed’s domestic loans and purchases of assets such as government agency securities, paid for by creating deposit accounts at the Federal Reserve, directly improve the flow of credit. Financial institutions can make loans backed by those accounts. (Conventionally, the Fed buys and sells Treasury securities to vary Fed deposit accounts owned by banks.)
However, he added, the result of the innovative purchases and loans, which expand the asset side of the Fed’s balance sheet, and offsetting them with the deposit accounts, which are liabilities on the other side of the Fed’s balance sheet, have doubled the dollar value of the Fed’s balance sheet.
Some observers, he noted, worry about the doubling because the expanded lending capacity could be inflationary when the economy recovers. In recovery, he assured his listeners, the Fed can shrink its balance sheet, partly because it has purchased short-term securities which will expire. He promised a smooth exit strategy.
Addressing another concern, risk of loss to the Fed from the innovative policies, he said the risk was extremely low; the assets are short-term and over-collaterized. The Bear Sterns and AIG operations affect only five percent of the Fed assets, Bernanke said. He added that the assets pay interest to the Fed.
Bernanke said the period between meetings of the Federal Open Market Committee, the Fed’s main policy body, and release of the minutes has been shortened and that the Fed will now release longer-term economic projections, so observers can judge the economic assumptions underlying policy measures. There will also be a Web site making information on Fed activities available.
During the question period, Bernanke avoided commenting on administration or congressional decisions associated with Treasury programs and the stimulus package. He said recovery requires both economic stimulus and stabilizing the banking and financial system.
The goal of policy, he said, is not to return to 2005 but to reach a long-term process of improved private balance sheets, implying more saving and less debt. For now, he said, public confidence to spend is needed. He quoted the Augustinian principle as, “Let me be moral, but not quite yet.â€ÂÂ
Prepared by Lorna Aldrich/ The National Press Club. All rights reserved.
————————————————
The fullvideo available at http://www.press.org
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warren mosler Reply:
February 21st, 2009 at 9:57 pm
Bernanke unfortunately is completely out of paradigm
He doesn’t know Fed policy is necessarily about rates and not quantities, and he doesn’t know subsequent ’shrinking of the balance sheet’ as well as ‘risk of loss’ is of no consequence, and for reasons other than he outlines.
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Teresa Reply:
February 21st, 2009 at 10:27 pm
Thank you.
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Scott Fullwiler Reply:
February 21st, 2009 at 10:58 pm
As is so often the case with people at the Fed, though, he gets some of the details, but can’t put the big picture together. Take a look at this quote from the speech:
“Moreover, other tools are available or can be developed to improve control of the federal funds rate during the exit stage. For example, the Treasury could resume its recent practice of issuing supplementary financing bills and placing the funds with the Federal Reserve; the issuance of these bills effectively drains reserves from the banking system, thereby improving monetary control.”
Somehow he can’t put together the fact that ANYTIME the Tsy issues securities, they are aiding the Fed in “monetary control.” That’s the point.
anon Reply:
February 22nd, 2009 at 10:19 am
Hillary also needs paradigm tutoring:
http://www.bloomberg.com/apps/news?pid=20601087&sid=abzdHM_2dVMo&refer=home
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February 21st, 2009 at 3:35 pm
Jcmccutcheon claims that having government sell treasuries is necessary to “execute interest rate policyâ€ÂÂ. In answer I would question whether an interest rate policy is necessary if demand is regulated by the “special cheque book†system I set out above (which amounts to printing money). Incidentally, given this form of regulation, obviously money would need to be clawed back by government if inflation loomed.
To illustrate, given a recession and assuming the latter were countered by “money printingâ€ÂÂ, the effect would be to reduce interest rates. I.e. where money production or destruction is the main tool, I suggest interest rates would tend to move in the appropriate direction automatically.
Secondly, even if a government wanted an interest rate policy in addition to the money printing tool, this still doesn’t justify selling treasuries every time a stimulus is required. I submit that all that is needed “treasury-wise†is a sufficient stock of treasuries to enable government to manipulate interest rates (by buying or selling treasuries). I see no reason why his stock is necessarily equal, as a percentage of GNP, to the US national debt in the year 2009. Indeed, there are countries with relatively small national debts which I assume manage to regulate interest rates.
A third point (of relevance specifically to the current recession) is that our problems stem largely from irresponsible lending. To cure the recession with ultra low interest rates, encourages yet more lending and borrowing: about as clever as giving crates of whisky to an alcoholic. Money printing combined with higher interest rates would be better (in as far as “high interest rates†are compatible with “printing moneyâ€ÂÂ: obviously the two tend to vary inversely, as pointed out above.)
Re Winterspeak’s post, the final para claims that handing out treasuries to the private sector is desirable in that this improves private sector balance sheets, which in turn boosts demand. Agreed. But this point is equally true of dishing out cash, dollar for dollar. Thus this is not a point in favour of dishing out treasuries RATHER THAN cash (i.e. money printing).
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Scott Fullwiler Reply:
February 21st, 2009 at 3:42 pm
Agreed, and don’t want to speak for the others, but I don’t see that there’s any real disagreement overall. Also, you might check out “Zero Is the Natural Rate of Interest” in the mandatory readings.
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winterspeak Reply:
February 22nd, 2009 at 1:12 am
“handing out treasuries to the private sector is desirable in that this improves private sector balance sheets, which in turn boosts demand. Agreed. But this point is equally true of dishing out cash, dollar for dollar. Thus this is not a point in favour of dishing out treasuries RATHER THAN cash (i.e. money printing).”
Agreed. I didn’t mean to suggest that G should dish out treasuries over cash (and not sure where I did that).
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jcmccutcheon Reply:
February 27th, 2009 at 12:04 pm
No I agree. There are simpler ways to structure the system. We are paying the price right now for the lack of understanding of this highly complex mechanism. It is so complex and unintuitive that Bernanke doesn’t get it all.
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warren mosler Reply:
February 27th, 2009 at 11:07 pm
deficit spending isn’t about ‘handing out treasuries’
the example i used to make the point begins with the govt selling tsy secs when there are excess reserves at the fed because that’s how it is today. so let’s take another look at same:
1. the govt sells tsy secs to the highest bidder which are ‘paid for’ via the fed debiting the sellers reserve account and reducing his excess balance.
No treasury secs have been ‘handed out.’ Instead, financial assets have been exchanged at ‘indifference’ levels- balances for tsy secs at ‘market.’
2. THEN the deficit spending ‘takes place’ as the tsy spends its new balances on real goods and service or transfer payment.
Both provide income. The spending IS gdp. It is not ‘handing out money,’ it is the purchase of goods and services.
The transfer payments are not counted as gdp. The transfer payments are ‘handing out money’
Tax cuts are ‘handing out money.’
With tax cuts (2) changes to the treasury cuts taxes which restores the balances used to buy the tsy secs.
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February 26th, 2009 at 3:39 pm
A variation on Mosler’s initial point above appears in today’s Financial Times, put forward by Tim Cogdon. See http://www.ft.com/cms/s/0/137e9606-0376-11de-b405-000077b07658.html
This F.T. article is a summary of pamphlet Congdon has just published. I have read the pamphlet, and the F.T. summary seems accurate enough. Instead of having government sell Treasuries in the open market, which is what Mosler suggests (as I understand it), Congdon proposes selling the UK equivalent (called “Giltsâ€ÂÂ) to commercial banks.
The net difference (if I’ve got this right) is that instead of government so to speak dropping Treasuries on the population at large from a helicopter (as per Mosler), the government drops cash on the population. The Congdon variation is a bit more logical in that in answers the criticism I made above, which was that if we want to reflate an economy, it makes a bit more sense to pump cash into the private sector than Treasuries (or Gilts).
A separate and incidental point is that Congdon claims that cash shortages in the corporate sector are an important contributor to the recession and that the additional cash supplies produced by the above proposal will cure the recession. He cites figures which he claims show a relationship between the cash positions of corporations and economic growth, unemployment etc. I disagree.
First some recent research done by Markit shows that firms (worldwide) are primarily short of demand, not credit. See http://www.ft.com/cms/s/0/41d9bc4e-fbc7-11dd-bcad-000077b07658.html?nclick_check=1
Second, seems to me that corporations are not bothered about borrowing large sums as long as they have healthy order books. Third, households are the ultimate source of all demand.
In short, the relationship that Condon finds between the cash position of corporations and economic growth etc may be explained by the fact that when corporations are short of cash, so too are households. The fundamental cause of lack of demand stems from households, not corporations, I suggest.
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Scott Fullwiler Reply:
February 26th, 2009 at 4:09 pm
You’ve completely misinterpreted Mosler. You need to differentiate b/n his description of what happens and what he would like to see happen. Selling Treasuries is the former, not the latter, at least in terms of managing the public debt and setting interest rates. He does advocate the Tsy “lending” short-term bonds at a fixed rate, but that has to do with stabilizing swap and repo markets.
The other point that you are missing is that selling Tsy’s vs. not selling Tsy’s is not the issue. The size of the deficit is. Either way you create net financial assets. And nobody was ever financialy constrained from spending or from obtaining credit to do so because they had a Tsy instead of a deposit. Reflate the economy with a large deficit. Whether you issue bonds or not is irrelevant and matters only for whether or not you are trying to hit a positive interest rate target above the remuneration rate. Again, though, Mosler’s not advocating issuing Tsy’s for this purpose since he argues that the interest rate target should be zero.
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warren mosler Reply:
February 27th, 2009 at 11:11 pm
as above, i’ve nowhere suggested dropping tsys from helicopters or handing them out.
yes, the net effect is the holdings of tsy secs increase but they are exchanged for balances that were either ‘handed out’ or ’spent’ by govt.
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February 27th, 2009 at 12:01 am
Mario Rizzo, the Austrian economist who recently pointed out JM Keynes’ support of a payroll tax cut, has another blog post in support of the Post Keynesian interpretation of Keynes. Worth a quick read:
Keynes Stimulus Follows Stability and Not Vice Versa
http://thinkmarkets.wordpress.com/2009/02/23/keynes-stimulus-follows-stability-and-not-vice-versa/
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Scott Fullwiler Reply:
February 27th, 2009 at 12:32 am
Not bad . . . certainly better than most Keynesians do.
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February 28th, 2009 at 3:21 am
The most important point to make here is that Mosler’s initial point above about £100bn treasuries is a good one (as Winterspeak has made clear). Also I agree with “Mosler’s Law†– in yellow at the top. In 47 above, I shouldn’t have used sloppy or “jokey†language like “handing out†and “dropping from helicoptersâ€ÂÂ: this just leads to misunderstandings. Re Mosler’s two most recent posts, I can find little to quarrel with (at least I think I more or less understand what he is saying , and I think I more or less agree).
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February 28th, 2009 at 12:13 pm
Thanks,and i’m going to change the law by adding the word ‘net’ just to be perfectly precise:
There is no financial crisis so deep that a sufficiently large increase in net public spending cannot deal with it.
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March 1st, 2009 at 12:54 pm
The whole think seem way too complicated! The helicopter thing sounds like fun but I bet someone would get hurt!
http://www.youtube.com/watch?v=jAdQKL7N3XU
Ron Paul seems to think that it is mismanaged, he also gets Bernanke to admit the fed is the biggest “Taxer†than any thing else.
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March 2nd, 2009 at 4:17 am
Mosler’s central claim for fiat currencies seems to be that they derive their value from the fact that households have to acquire the currency to pay tax. I suggest that consumers no more need the currency to pay tax than they need the currency to pay for a variety of essentials provided by the private sector: food, clothing or shelter. Thus “tax†is simply a fancy name for payments to a large conglomerate called “government†which provides a large variety of services.
Mosler cites Adam Smith and gives an example from the British in Africa of where a dictatorial regime can gain benefits for itself by imposing a fiat currency and collecting tax. (This is in the “Full Employment….†mandatory reading). These quotes are interesting, but not relevant because in a democracy, governments do not have any very effective monopoly powers that are of relevance here. Governments do wield various monopoly powers which we all agree are desirable: arresting criminals, taxing alcohol, etc, but for more mundane products, citizens just don’t let governments exploit monopoly powers.
For example in a democracy if government provides services in what citizens think is an inefficient manner, then citizens boot the government out at the next election. Or citizens campaign for the removal of specific politicians or bureaucrats. Or they campaign to have the relevant services privatised, a movement which reached a peak in the UK during Margaret Thatcher’s reign, and resulted in the privatisation of large chunks of the government machine.
Re the need for the government to be the “fiat money printerâ€ÂÂ, this is not supported by history. The UK was off the gold standard between World War I and 1926 and again between 1931 and 1946. During these periods the Bank of England was privately owned. In 1946 it was nationalised. The pound Sterling did not collapse in value as a result of the central bank being privately owned. (As I understand it, the Bank of England did not do very much fiat money printing during this period. The 1930s depression would have been moderated if it had.)
Re government’s monopoly on the issue of fiat currency, I don’t believe this enables government to raise demand willy nilly. The constraint on raising aggregate demand is inflation. For much of the post WWII period, developed countries have not needed unusual ideas on Chartalism or fiat currencies to keep demand pretty much up to the limit imposed by inflation (and have all too frequently exceeded this limit). At least, developed countries have done much better than they did in the 1930s. In other words I don’t agree with the opening paragraphs above where Mosler suggests there has been a gross underutilisation of resources due to our not understanding fiat currencies. Yes, we could do better. But I don’t think the improvement will come from Cartalism or new ideas on fiat currencies.
The idea that government should be employer of last resort (ELR) is an example: most developed countries have implemented limited ELR systems over the last century without needing to adopt new ideas on Cartalism or fiat currencies. (By “limited†I mean something short of Mosler’s “jobs for all†proposal.)
I don’t think setting up ELR is dependent on new ideas on fiat currencies, plus I don’t think the deficit poses a constraint here. To illustrate, here is an ultra simple “jobs for all†ELR system. We pass a law saying that all the unemployed henceforth have a “job†which consists of them walking round their neighbourhood keeping it free of litter. Pay, for the sake of simplicity, shall equal unemployment insurance or “unemployment benefit†as it used to be called in the UK. Given that unemployment benefit in some countries is only slightly less than the minimum wage, there would not be much of a need to increase the deficit to do this. Indeed, there would not be any need to increase the deficit, since the money could always come from additional tax.
The latter ELR system is of course ludicrously simple and crude. I can think of ways of improving on it, which I’ll try to do under the “Full Employment…†mandatory reading heading: I’m sure everyone is interested in my pearls of wisdom (????).
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March 2nd, 2009 at 8:32 am
you are missing some of the basic logic and descriptions.
try re reading ’soft currency economics’ and ‘full employment and price stability’ on this website?
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March 2nd, 2009 at 9:02 am
#55 I will tell my grandkids I was present when the great warren mosler edited mosler’s law.
Do you support this warren? Lots of jobs to create:
http://www.youtube.com/watch?v=BnAynsOFPNU&feature=channel_page
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March 3rd, 2009 at 6:26 am
I am re-reading, as instructed. Before answering can I draw attention to a real world “mini economy†which suffered from unemployment and solved the problem by implementing Mosler’s law (sort of). This is the Washington DC “baby sitting economyâ€ÂÂ, which Paul Krugman has tried to draw everyone’s attention to. See http://www.slate.com/id/1937/
Paul Krugman starts the article by saying “Twenty years ago I read a story that changed my life.†I can see why. Read the story at the above site, and (if you have a gut interest in economics) you’ll feel like doing an “Archimedesâ€ÂÂ, i.e. running round your neighbourhood in the nude shouting “Eureka!â€ÂÂ.
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March 3rd, 2009 at 7:54 am
read that long ago and what k and others miss is that ‘currency’ and other ‘lets’ type currencies only work to the extent people are willing to sell their labor and get nothing but a hope from others that you can buy their labor with the ‘credit’ from what you already did. While it does ‘work’ it’s a very weak force.
if those currencies were also acceptable for tax payments they’d become strong forces.
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March 3rd, 2009 at 8:02 am
NOTICED THIS FROM WINTERSPEAK:
Yup, if the Treasury issues 9% on 20 year notes, then people would exchange cash bank deposits (one kind of liability) for these awesome 9% 20 year notes (another kind of liability).
This would certainly reduce the I component of AD.
BUT WOULD IT? THE ECONOMETRIC EVIDENCE SEEMS TO SAY THE REVERSE. MAYBE IT’S BECAUSE THE DOMESTIC SECTOR IS A LARGE NET SAVER, AND HIGHER RATES INCREASE PERSONAL INCOME VIA THE INTEREST RATE CHANNEL?
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March 3rd, 2009 at 8:41 am
Warren,
Fed/FOMC is currently buying $500B of MBS thru June 09 (from zero).
Do you think that following the progress of this would be of interest wrt the Feds setting of interest rates out the curve as discussed above? (I think it is the Feds intention to lower interest rates for mortgages by buying up MBS)
Resp,
http://www.ny.frb.org/markets/mbs/
WeekEnd MBSPur Total 10-yr Yld
1/7 10.2 10.2 2.494
1/14 23.4 33.6 2.213
1/21 19.0 52.6 2.526
1/28 16.8 69.4 2.656
2/4 22.3 91.7 2.914
2/11 23.2 114.9 2.762
2/18 19.9 134.8 2.728
2/25 25.0 159.8 2.945
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March 3rd, 2009 at 9:09 am
yes, as before, it’s always about price (interest rates) and not quantity, whether the Fed gets it or not, thanks!
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March 3rd, 2009 at 4:01 pm
Warren: “Yup, if the Treasury issues 9% on 20 year notes, then people would exchange cash bank deposits (one kind of liability) for these awesome 9% 20 year notes (another kind of liability).
This would certainly reduce the I component of AD.
BUT WOULD IT? THE ECONOMETRIC EVIDENCE SEEMS TO SAY THE REVERSE. MAYBE IT’S BECAUSE THE DOMESTIC SECTOR IS A LARGE NET SAVER, AND HIGHER RATES INCREASE PERSONAL INCOME VIA THE INTEREST RATE CHANNEL?”
By “I” I meant Investment, not Income. Should have been more clear. Yes, 9% treasuries would be great for interest income, but they would also provide stiff competition for investment. Why buy stocks when you can get 9% from treasuries?
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March 3rd, 2009 at 4:11 pm
Yes, 9% treasuries would be great for interest income, but they would also provide stiff competition for investment. Why buy stocks when you can get 9% from treasuries?
POSSIBLY. BUT NOTE TWO THINGS:
1. ONLY PROJECTS THAT CAN EXCEED A HURDLE OF THE RISK-FREE RATE (IN THIS CASE 9%) PLUS A RISK-PREMIUM WOULD EVEN MAKE IT TO THE INVESTORS IN THE FIRST PLACE.
2. WHETHER OVERALL DOLLAR VALUE OF PROJECTS THAT CROSS THAT HURDLE AND THEN PRESENTED TO INVESTORS RISES OR FALLS AS A RESULT OF THE HIGHER TSY RATE DEPENDS UPON EXPECTED FREE CASH FLOWS FROM THE PROJECTS, WHICH DEPENDS ON SALES, WHICH DEPENDS ON INCOME, WHICH DEPENDS IN PART ON INTEREST INCOME.
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March 3rd, 2009 at 8:00 pm
right, also, investment never gets ‘crowded out’ by consumption.
if the demand to consume is there, the products tend to get priced, sooner or later, at levels that drive investment, with interest rates being a cost of production that gets priced into the goods and services that attract investment.
in that way higher interest rates drive up cpi as well as support incomes.
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March 3rd, 2009 at 8:21 pm
Both: Good points.
SCOTT: Yes, 9% RFR is a high hurdle. But, fewer projects means spending on investment goes down.
WARREN: Yes, if the cash flow is there, you’ll get investment projects in a 9% risk free environment. Higher interest rates can certainly drive up CPI to the extent they support HH incomes. (Note though, that high interest rates do not help HHs with floating loan obligations).
Net net, though, if Bernanke raised FFR to 9% tomorrow, you would see less investment activity.
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March 3rd, 2009 at 8:41 pm
right, some get hurt, some helped. but the non govt sector is a net saver to the tune of the cumulative govt securities outstanding.
what we have seen is a collapse in investment as rates were cut from 5.25 to 0. Maybe a couple of hundred $billion of interest income has been removed from the non govt sectors.
Looks to me the lower incomes are a stronger force than any difference in the propensity to consume differences between borrowers and savers?
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March 3rd, 2009 at 10:20 pm
Winterspeak . . . agreed. My point is a theoretical (and logical) one . . . the comparison is never rf rate vs. a project. But given this, whether or not investment spending rises in a particular context is an empirical issue. I think, regarding US, a 9% rf rate for several reasons reduces projected fcf right now or at least not enough to clear the higher hurdle (to further agree). But, if you raise rf rate in Japan, given level of debt/gdp and high savings rate, you may get more projected fcf.
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March 4th, 2009 at 11:41 am
WARREN: We may need to agree to disagree. What you say is possibly true, but I don’t think that investment has collapsed in the US because cutting rates from 5.25 to 0 reduced AD by reducing interest income. I think investment collapsed because AD collapsed because the private sector wants to save *despite* ZIRP. We agree, though, that in this context, ZIRP may well be doing more harm than good, as it does not change savings behavior *and* reduces interest income.
SCOTT: Good point re: Japan.
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March 4th, 2009 at 12:43 pm
Also, if rf-rates crowed out investment, wouldn’t the rate drop from 5-0
have brought back that lost investment demand?
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March 4th, 2009 at 1:33 pm
Winter,
I agree to agree. the lower rates contributed but weren’t what initiated the fall in investment.
in this case i’d say it was the discovery of the sub prime fraud against a backdrop of a falling budget deficit.
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March 9th, 2009 at 1:19 pm
I have re-read Soft Currency Economics as per instructions in 58 above. I am pleased I did because this just confirmed my impression that the whole Chartalism argument contains numerous errors, as does Warren’s advocacy of Chartalism. The errors are so numerous that it took me almost 2,000 words to properly spell them out. I thought this was too much to put on Warren’s site, so I put them on a specially set up blog: http://chartal.blogspot.com/.
But if Warren wants me to paste these 2,000 words, or part of them onto his site with a view to continuing the discussion on his site, I’m happy to do that.
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March 9th, 2009 at 1:44 pm
DON’T POST IT HERE. IT GOES BAD EARLY:
In contrast, in democracies, governments just don’t have significant dictatorial economic powers. Democratic governments are essentially glorified conglomerates which provide a variety of goods and services. Payment for these services happens to be called “tax”. But the name “tax” is irrelevant. One could equally well call the payments that citizens make to other large conglomerates a “tax” (e.g. payment for food at large supermarket chain).
IF YOU DON’T UNDERSTAND THE DIFFERENCE BETWEEN A TAX OBLIGATION VS A RETAIL PURCHASE WE HAVE NOTHING FURTHER TO DISCUSS. OTHERS MAKE THIS SAME POINT, BY THE WAY, GOING SO FAR AS TO SAY TAX PAYMENT IS VOLUNTARY BECAUSE IT’S VOTED ON BY THE ELECTORATE. AGAIN, THAT COMPLETELY MISSES THE POINT OF LOGIC.
THIS COMPLETELY MISSES THE POINT AS WELL:
2. Tax is not necessarily paid in fiat money.
In the UK (and perhaps other countries) citizens do not absolutely have to pay taxes in the local fiat money. They can pay, if they want, by giving the tax authorities a house, plot of land, or lump of gold.
THESE PAYMENTS ARE VALUED AT CURRENT MARKET PRICES IN THE GOING UNIT OF ACCOUNT, AND THEREFORE ARE NOT FUNCTIONALLY DIFFERENT THAN PAYING IN THE LOCAL CURRENCY.
IT WOULD MAKE A DIFFERENCE IF TAXES WERE DENOMINATED IN FIXED AMOUNTS OF GOLD OR ANY OTHER SUBSTANCE OR SERVICE. THIS WOULD INCLUDE THE GOLD STANDARD OR OTHER FIXED EXCHANGE RATE REGIMES.
I HAVE DISCUSSED THIS POINT MANY TIMES WITH SCHOLARS, BANKERS, ECONOMISTS, AND MANY OTHERS WHO HAVE IMMEDIATELY SEEN THE ERROR OF THEIR WAYS AND MOVED ON. HOPE YOU ARE ONE OF THEM!
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March 9th, 2009 at 5:20 pm
I’m not so naive to think that Chartalism is perfect and without any flaws, but I have read/heard numerous criticisms over the last 10+ years and had dozens and dozens of conversations in that time, and I have yet to find anyone who disagrees or critiques Chartalism who actually can demonstrate that they understand Chartalism. Mostly they’re just building and knocking down red herrings. Ralph’s piece, while an honest attempt, is in the same category.
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September 3rd, 2009 at 7:17 am
The point that Warren makes right at the top is interesting. However I’ve had further doubts about it.
To the extent that government borrows $Y for X years because it induces the private sector to abstain from spending $Y over X years because of a small interest rate rise, the reflationary effect of government spending is cancelled out by the deflationary effect of the private sector NOT spending. Put another way, the increase in the private sector’s net financial assets (psnfa) does not induce extra spending: this extra psnfa RESULTS from the interest rate rise.
Alternatively, to the extent that the private sector has idle bank balances (i.e. to the extent that the private sector has ALREADY decided not to spend $Y over X years), the result of govt borrowing would then be to increase the velocity of circulation of money: the net result WOULD be reflationary (i.e. boost demand). But in this case, the private sector (or at least the private sector individuals who lend to govt) are relatively indifferent to size of their net financial assets. I.e. the reflationary effect comes from the above increased velocity, not from increased psnfa.
Just to emphasise the importance of velocity, this fell 72% in New York between Oct 1929 and March 1932 according to an article entitled “You can print money, but not confidence†in The Times, by William Rees-Mogg.
When the UK govt decided to borrow and spend earlier this year, this was rubbished by the German finance minister on the grounds that “borrow and spend†has no effect. I sympathise with the latter view. Because of the uncertain effects of borrow and spend, I’d be happier (as I pointed out in earlier posts above) if governments which wanted to reflate just spent (with no corresponding borrowing or tax increase). I.e. I prefer good old Mugabwe style money printing, but done in a more controlled fashion than Mugabwe. There is no doubting the effect of Mugabwe style money printing: look at Zimbabwe.
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September 3rd, 2009 at 8:36 am
To the extent that government borrows $Y for X years because it induces the private sector to abstain from spending $Y over X years because of a small interest rate rise,
SORRY, BUT THAT’S NOT THE ‘REASON’ FOR GOVT. ‘BORROWING’ WITH A NON CONVERTIBLE CURRENCY.
the reflationary effect of government spending is cancelled out by the deflationary effect of the private sector NOT spending.
THAT’S NOT AT ALL WHAT I WAS GETTING AT.
Put another way, the increase in the private sector’s net financial assets (psnfa) does not induce extra spending: this extra psnfa RESULTS from the interest rate rise.
AGAIN, NOT MY POINT AT ALL.
Alternatively, to the extent that the private sector has idle bank balances (i.e. to the extent that the private sector has ALREADY decided not to spend $Y over X years), the result of govt borrowing would then be to increase the velocity of circulation of money: the net result WOULD be reflationary (i.e. boost demand). But in this case, the private sector (or at least the private sector individuals who lend to govt) are relatively indifferent to size of their net financial assets. I.e. the reflationary effect comes from the above increased velocity, not from increased psnfa.
THE ISSUING OF TSY SECS IS NOT A CONSTRAINT ON SPENDING.
UNDER A GOLD STANDARD IT IS A CONSTRAINT ON CONVERSION WHICH IS THE POINT OF GOVT SECURITIES UNDER THOSE CIRCUMSTANCES.
Just to emphasise the importance of velocity, this fell 72% in New York between Oct 1929 and March 1932 according to an article entitled “You can print money, but not confidence†in The Times, by William Rees-Mogg.
THAT GOLD STANDARD WASN’T SUSPENDED UNTIL 1933/1934.
When the UK govt decided to borrow and spend earlier this year, this was rubbished by the German finance minister on the grounds that “borrow and spend†has no effect. I sympathise with the latter view.
I DON’T. HE WAS ENTIRELY WRONG.
Because of the uncertain effects of borrow and spend, I’d be happier (as I pointed out in earlier posts above) if governments which wanted to reflate just spent (with no corresponding borrowing or tax increase).
THAT DOESN’T MAKE ANY DIFFERENCE. NOTE THE BUILD UP OF THE FED’S BALANCE SHEET HAS HAD NO FURTHER EFFECT, AS INDICATED ELSEWHERE ON THIS SITE.
I.e. I prefer good old Mugabwe style money printing, but done in a more controlled fashion than Mugabwe. There is no doubting the effect of Mugabwe style money printing: look at Zimbabwe.
THAT AMOUNT OF DEFICIT SPENDING WOULD BE INFLATIONARY WHETHER SECURITIES WERE SOLD OR NOT. LIKE THE GREAT LATIN AMERICAN INFLATIONS, AND TURKEY’S YEARS OF INFLATION.
SORRY, BUT YOU’VE COMPLETELY MISSED THAT POINT
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